Immediate annuity (in 5 years time) or a 5-year deferred now? (Sorry)

[jammes2014]

Thanks guys, I plan to take a look at Millionaire Teacher. Mathjak, I appreciate your charts and graphs... a bit over my head, but I think I read that you see some benefit to the 5-year deferred.

unno2002, I’ve got a couple of very, very small places abroad that rent pretty easily – to foreign students especially. (So small that the upkeep consists only of a paint job every few years.) However, in the US, I don’t think I have what it takes to deal with tenants, and am not much of a handyman either. But again, isn’t $622 on $100,000 in the sameballpark as what you’re doing? Withoutthe headaches to boot?

[Gill]

Quote:

Originally Posted by aja8888 Please tell us your secret on a recently purchased annuity that returns over 10%.

Purchased just this week from Principal Life Insurance Company through Vanguard. 76 years of age which is obviously a factor. Does that little wink indicate I'm BS'ing you? Would you like to see the contract? Better yet, you can do your own research on Vanguard's Website. Surprised to see such a comment from a moderator.
Bruce

[pb4uski]

Quote:

Originally Posted by MBMiner Purchased just this week from Principal Life Insurance Company through Vanguard. 76 years of age which is obviously a factor. Bruce

I think you may be confusing a 10% payout rate with a 10% return (IRR).

I would not doubt that a 76 year old could get a 10% payout rate, but that is not a 10% return because a good portion of each annuity payment you receive is a return OF your premium and not a return ON your premium.

[FIRE'd@51]

Quote:

Originally Posted by jfb123 But am I wrong to look at $622 on an investment of $100,000 (this would be the fixed, five-year deferred annuity) as yearly return of 7.6%?? Albeit after five years….

Yes, that would be incorrect. The 7.6% would be a withdrawal rate, not an annual return. It includes return of principal. To calculate the annual return, you would need to estimate the number of years the annuity would pay out and calculate the IRR.

[REWahoo]

Quote:

Originally Posted by MBMiner Does that little wink indicate I'm BS'ing you?

I think it indicates identifying a statement that appears far too good to be accurate. Looks like a terminology issue as Pb4 points out above.

[Gill]

Quote:

Originally Posted by pb4uski I think you may be confusing a 10% payout rate with a 10% return (IRR). I would not doubt that a 76 year old could get a 10% payout rate, but that is not a 10% return because a good portion of each annuity payment you receive is a return OF your premium and not a return ON your premium.

Thanks for straightening me out. I'm an attorney, CPA, and former trust company executive but I must have overlooked that. I intentionally used the word "return" to indicate cash flow, not yield.
Bruce

[pb4uski]

Quote:

Originally Posted by jfb123 I’ve managed to save a good deal but have never been that good at handling my own investment accounts. Furthermore, I do rather desire some predictability. Eventually, I’d be OK with putting about half, or more, of my worth into an annuity – either an immediate annuity when I turn 62 or, in order to lock in a bit more, purchasing a 5-year deferred annuity now. I’m wondering what the thoughts here would be from those not completely adverse to annuities. Thanks. Today’s figures are these: immediate annuity ($100,000) = $954 monthly; 5-year deferred = $1,244.

Your interest in payout annuities seems to arise more from discomfort with investing your money and an interest in predictability than a genuine interest in guaranteed lifetime income.

I think a better option would be to just buy Vanguard's Wellesley Income fund and then (or five years from now) set up automatic withdrawals for $1,000 or $1,250/month. Wellesley has been a very steady performer and is ~60% bonds and 40% equities and is actively managed so you don't really have to do anything. As an added bonus, qualified dividends and LTCG would be tax-free in your tax bracket.

The problem with a payout annuity is that the payouts don't increase for inflation but your living expenses do increase for inflation. Under the Wellesley alternative, it is likely that you can periodically give yourself a raise and increase the monthly automatic withdrawals, but there are no guarantees.

[Gill]

Quote:

Originally Posted by REWahoo I think it indicates identifying a statement that appears far too good to be accurate. Looks like a terminology issue as Pb4 points out above.

...and as I pointed out later, my terminology is correct. I'm surprised anyone on this board would think anyone was stupid enough to think they had found a means of insuring a guaranteed 10+% return. When discussing SPIA's, the discussion always centers around cash flow. Obviously this is not yield or IRR.
Bruce

[mathjak107]

Quote:

Originally Posted by unno2002 An annuity is just another potential tool, to be compared against or used in conjunction with other options. An annuity (generally) offers a fixed monthly payment with zero residual equity, a “risk” being the profitability of the annuity provider. To example a comparable alternative, in 2013 we bought a small rental for $77,500, which is bringing in $805/month. After expenses it is putting in our pocket (ignoring tax write offs) a consistent $583/month. ($6996 per year.) We have the risk of no tenants, repairs, etc., but with the potential for the equity aspect of the investment increasing, available to leave to heirs.

What you have to be careful of is comparing apples to apples. comparing an annuity to a rental would be like comparing it to equities.

An annuity is a replacement for some or all of the cash ,bond side of things and has to be compared to that side of things.

the rental , real estate , stock side would exist in either scenario as the best way to use an annuity is as a cash bond replacement not as a replacement for your investments.

[pb4uski]

Quote:

Originally Posted by MBMiner ...and as I pointed out later, my terminology is correct. I'm surprised anyone on this board would think anyone was stupid enough to think they had found a means of insuring a guaranteed 10+% return. When discussing SPIA's, the discussion always centers around cash flow. Obviously this is not yield or IRR. Bruce

I was surprised that you were not clear given your other posts which seem to be well informed. You said (emphasis added):

Quote:

Originally Posted by MBMiner .....My most recent purchase is returning over 10% in distributions. ....

Your use of the word "returning" rather than "providing" or some similar term created the confusion. Least confusing would be simply referring to a 10% payout rate and avoiding the term "return" since it is difficult to apply to life contingent annuities (at least while the annuitant is still living).

Edited to add: I just saw your post in response to mine where you pointed to your incorrect terminology... no worries... confusion on payout vs return happens all the time around here.

[Gill]

Quote:

Originally Posted by pb4uski ... confusion on payout vs return happens all the time around here.

I still think you're the one confused. I understand it is payout, not a return on your original investment. When speaking of SPIA's, yield is normally ignored because you must know the date of death to compute yield accurately and that, of course, is impossible. In any case, my statement of a payout of more than 10% is truthful and I can't help but be a little annoyed at those who questioned my veracity.
Bruce

[pb4uski]

I'm not confused at all. As a fellow CPA who spent 25 years in the insurance industry, 5 years a chief accounting officer of a life insurer that issued annuities, and served on the AICPA Insurance Companies Committee, I think I know the difference between payout and return on an annuity.

If you had stated that the payout was more than 10% then there would not have been any confusion.

If you had used precise language in describing it then no one would have questioned you.

[Gill]

[MRG]

Quote:

Originally Posted by pb4uski I'm not confused at all. As a fellow CPA who spent 25 years in the insurance industry, 5 years a chief accounting officer of a life insurer that issued annuities, and served on the AICPA Insurance Companies Committee, I think I know the difference between payout and return on an annuity. If you had stated that the payout was more than 10% then there would not have been any confusion. If you had used precise language in describing it then no one would have questioned you.

Hey it gave me a short education. I knew there was something I wasn't understanding.

[haha]

Quote:

Originally Posted by pb4uski I'm not confused at all. As a fellow CPA who spent 25 years in the insurance industry, 5 years a chief accounting officer of a life insurer that issued annuities, and served on the AICPA Insurance Companies Committee, I think I know the difference between payout and return on an annuity. If you had stated that the payout was more than 10% then there would not have been any confusion. If you had used precise language in describing it then no one would have questioned you.

Hombres bravos pelean!

[Gill]

Quote:

Originally Posted by MBMiner My most recent purchase is returning over 10% in distributions.

This was my original post which I don't think could have been clearer. I didn't say it was "returning" 10%. I said it was "returning over 10% in distributions" which makes it very clear that I am not talking about investment yield but rather total distributions from the SPIA. There are probably other ways to describe the receipts from an SPIA, but I fail to see how this language is unlear and subject to misinterpretation. It may not be the "precise language" that pb4uski,CPA prefers, but it is as precise as I can make it.
Bruce

[pb4uski]

Point taken. When I first read your post I would have thought the 10% was a payout rate because of the word "distribution" and the fact that there isn't an annuity that I can think of that has a 10% return. However, your use of the word "returning" unfortunately introduced confusion for at least two posters (a moderator and moderator emeritus at that). In retrospect, I probably should have addressed my response in post #23 to aja8888 and REWahoo and explained to them that the 10% you cited was a payout rate rather than a rate of return because you referred to it as a distribution.

[nun]

Buying a fixed SPIA with a portion of your money has many advantages....not least being peace of mind. The bond market might get "interesting" in the next fe years so I see more people one again considering annuities. Unfortunately they'll be drawn to expensive and complex variable annuities that are often dangerous in retirement because of order or returns issues.

So to the OP if you want safety and stability look at a fixed SPIA to augment SS. But keep enough of your money invested in equities for growth and to beat inflation. I'd part your SPIA money in a five year CD and wait for interest rates to go up a bit.

[nun]

Quote:

Originally Posted by MBMiner ...and as I pointed out later, my terminology is correct. I'm surprised anyone on this board would think anyone was stupid enough to think they had found a means of insuring a guaranteed 10+% return. When discussing SPIA's, the discussion always centers around cash flow. Obviously this is not yield or IRR. Bruce

I got a pretty good deal the other day; a 7% payout rate with a COLA at age 55. If I live to be 76 the IRR is 6%....84 and the IRR is 8.3%. I'm using 20% of my retirement money to buy it and it will cover 2/3rds of my income needs.

[mathjak107]

what did you get ?